Liquidity conditions in global financial markets are set to deteriorate over the next year, resulting in $10 trillion squeeze in funds available for investment.

This very big number represents about 10% of the $100 trillion global liquidity pool (World GDP is $77 trillion) which is roughly the equivalent of the net contraction suffered during the crises of 2008/09 and 1996/98.

CrossBorder Capital’s Global Liquidity Index™ identifies huge forces weighing down on investment conditions over the next 12 months, driven by an appreciating dollar that is making financing in Asia more expensive and increasing its scarcity.

  • Asia, led by China, now represents 41.6% of the global liquidity pool, up from 29% in 2000.
  • Because Asia is a bigger part of the pool and non-Japan Asia uses the dollar, a US currency rise will have greater repercussions on the world economy and financial markets.
  • Fed policy is set for US economic conditions. The US now represents about 25% of the global liquidity pool, down from 37.7% in 2000 an 38.8% in 1985. Tighter policy may be right for the US, but it will hurt Asia and China in particular
  • Since 1985, the global liquidity pool has increased by 11 times.
  • The US dollar is now used in as many as 75% of all crossborder transactions.

USD Packs (PD)The problem is no longer the leverage of US shadow banks nor, perhaps the debt exposure of the eurozone banks but the heavy reliance of Asian and international credit on the US dollar,” said Michael Howell, managing director of CrossBorder Capital, which has been compiling the GLI™ for more than 20 years. “

“The international banking system effectively represents off balance sheet activity in US dollar liquidity, somewhat similar to the runaway Eurodollar markets in the 1970s.

“Most crossborder lending lending is made in US dollars and not all of it is made by US domestic bank with access to Fed cash in an emergency. The leverage of a US dollar bank loans made by an Asian bank to finance trade or investment in China may be extremely sensitive to moves in Fed policy and the value of the dollar.”

The Global Liquidity Index™ – which tracks global money flows – showed a reading of 43.8 in October compared with 43.0 a month earlier. A reading above 50 denotes expansion, a reading below 50 a contraction.

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